Unable to Make Student Loan Repayments?

Are Loan Deferment and Loan Forbearance the Answer to Student Debt?

May 21, 2009

Graduates are struggling to maintain student loan repayments. Diminishing career opportunities means that loan deferment and loan forbearance are becoming a necessity.

The majority of young people attend higher education on the premise that student loan repayments will easily be offset by the greater income a university education brings. According to "The smart student guide to financial aid: Student loans" report by FinAid.org, the average student debt currently stands at $21,899. The declining global economy means that there are now fewer job opportunities so loan forbearance, loan deferment and student loan default rates are rising sharply.

Rising Student Loan Default Rates

Deanne Loonin, a staff attorney of the National Consumer Law Center, stated: "The volume of people in trouble is definitely increasing." According to it's latest report, SLM Corp (Sallie Mae) wrote off 3.4% of 'troubled' loans in 2008. Citigroup also had no alternative but to write-off 2.3% of student debt. All university graduates enjoy a six month repayment holiday on federal student loan repayments.

Loan Forbearance

Loan forbearance allows a graduate to defer repayment for up to a period of three years. Whilst this helps overcome short-term financial difficulties, it can worsen finances in the long run as interest remains payable so student debt rises. For example, not making repayments for 12 months on a $20,000 student loan at 7% will add $1,400 to the amount owed.

Loan Deferment

Those with federal loans are likely to find that loan deferment is better than loan forbearance. This is due to the government paying the interest on subsidized federal loans. However, this won't help those who are struggling with unsubsidized and PLUS loans. According to Mark Kantrowitz of FinAid.org: "Deferments and forbearances should mainly be used as a method to solve a temporary problem.”

Lower Student Loan Repayments by Extending the Term

An extension of the term can reduce student loan repayments considerably. This can be an excellent option for those entering careers where they are likely to enjoy salary increases as their career progresses. Spreading repayments over an extended period will result in lower repayments, but also increases student debt as more interest will accrue.

Student Debt Alternate Repayment Plan

Those in relatively low income jobs who took out a federal loan to finance their university education are likely to find that it is better to tackle student debt with an alternate repayment plan. An income-based repayment is made instead of the normal student loan repayment. Payment is limited to 15% of income and the remaining amount is written-off after 25 years of repayments.

Graduates with federal loans have far more options than those who took out private loans. Whilst the government offers a number of helpful alternatives including loan forbearance, loan deferment, term extension or an alternate repayment plan. Those who took out private loans may be able to negotiate with the lender in order to enjoy greater flexibility. Loan forbearance lasts for a maximum of 12 months.

Bernard, Tara Siegel. (April 17, 2009). "In grim job market, student loans are a costly burden." The New York Times.

Chaker, Anne Marie. (April 21, 2009). "Student loans: default rates are soaring." The Wall Street Journal.

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